Dallas Fed Survey: More M&A? Sure, but 2024 Remains Uncertain

Most E&Ps are likely to keep spending the same or less in 2024—but how producers deploy capital depends largely on the size and type of company, according to the Federal Reserve Bank of Dallas’ 2023 fourth quarter survey.

Michael Plante, Dallas Fed senior research economist and adviser, said the oil and gas sector appears to have entered a holding pattern, but that plans for companies vary greatly depending on the size.

“A majority of executives at smaller E&P companies report their primary goal for 2024 is to maintain or grow production,” he said. “On the other hand, executives at larger E&P firms were more likely to report their goal is to acquire assets or reduce debt levels.”

Among smaller E&Ps, 25% of respondents wanted to maintain production, while 41% said they intended to grow volumes. At larger operators, 35% of respondents were focused on acquisitions, followed by the 20% focused on reducing debt.

The survey, conducted from Dec. 6 to Dec. 14, asked 144 energy firms—including 96 from E&Ps and 48 at oilfield service firms—about spending, M&A, commodity prices and access to capital, among other topics.

Shale “inching toward death”

The topic E&P and oilfield service respondents were most unified on was M&A. Among all respondents, 77% expect large-scale M&A and 23% aren’t anticipating transactions of that value.

After acquisitions totaled at least $50 billion in 2023, respondents were asked if they expected more megadeals, similar to those by Exxon and Chevron, to continue within the next two years.

Service companies, however, expressed concerns about further M&A, with some of those surveyed seeing further combinations as a threat to smaller E&Ps.

“The consolidation of operators will impede the growth and sustainability of the oilfield service sector,” one executive told the Dallas Fed. “This will lead to the demise of small independent oil and gas operators, as they will be unable to obtain reasonable pricing from the few remaining service providers.”

Another said the Federal Trade Commission “should adopt a policy that would stop the wholesale purchases of these large companies, as it is detrimental to the energy health of the nation and economic stability to our communities.”

M&A activity, another respondent said, has made smaller operators, which are the sector’s target customers, more cautious in their decisions. That’s resulted in new business growth slowing.

Still another observed that the acquisitions “occurring in the oilfield are not helpful.”

One E&P executive also saw 2023 M&A as the writing on the wall for smaller operators.

“Majors are explicitly investing on the thesis that the back end of the forward curve for oil is just plain wrong,” the executive told the Dallas Fed. “Inventory for U.S. onshore will be extremely valuable in five years as shale inches toward death and moves to terminal decline. Prices are likely closer to $150 than $50 at the end of the decade. The young folks in energy need to learn offshore and international exploration quickly.”

Commodity price worries

Another broad area of agreement was commodity prices, regardless of an operators’ size. About 64% of respondents said they were basing their capital plans around prices ranging from $70/bbl to nearly $80/bbl.

For planning purposes, the average respondent said they assumed WTI prices of $71/bbl—relatively close to 2023 assumptions of $73/bbl. Overall, respondents expected a Henry Hub natural gas price of $3.09/MMBtu at yearend.

While the survey was conducted, WTI spot prices averaged $69.77/ bbl and Henry Hub spot prices averaged $2.48/MMBtu.

Nevertheless, oil prices left some executives feeling uncertain about 2024 economics.

“The recent decline in the oil price and a more negative economic outlook are possible headwinds for clients’ budgets in 2024,” one respondent said.

“Weakening oil prices below $70 per barrel and near-zero residue gas prices in the Permian, along with weak natural gas liquids prices, will limit capital investment in 2024, as it is determined by operating cash flow.”

Another E&P executive said the “big question is will OPEC+ be able to keep the price of crude oil up.”